Debt Risk Heads for Third Weekly Rise as Yields Surge in Europe

June 7 (Bloomberg) -- The cost of insuring European
corporate bonds is heading for its third weekly increase as
yields surge amid concern central banks will curb their efforts
to boost economic growth.

The Markit iTraxx Europe Index of credit-default swaps on
125 companies with investment-grade ratings rose eight basis
points this week, and was at 111 basis points at 10:51 a.m. in
London, the longest stretch of weekly gains since March. Average
yields on the debt rose nine basis points to a two-month high of
1.99 percent, according to Bank of America Merrill Lynch’s Euro
Corporate index.

Credit markets are paring a four-month rally after Federal
Reserve Chairman Ben S. Bernanke said last month the central
bank could start trimming $85 billion of monthly asset purchases
if the employment outlook shows “sustainable improvement.” A
report today is projected to show U.S. payrolls grew by 163,000
in May, according to a survey of economists, boosting the
prospect the Fed will curb its quantitative easing program.

“If payroll numbers are very strong today, that will be
associated with increased expectations of tapering of QE,” said
Nick Burns, a credit strategist at Deutsche Bank AG in London.
“There are those who think we could see QE tapering as soon as
this summer while others think we might not see any this year at
all. That’s created the uncertainty that we’re seeing reflected
in risk assets.”

Average yields on junk-rated notes climbed 23 basis points
this week to 5.46 percent, the highest in a month, Bank of
America Merrill Lynch index data show. The spread over
government debt widened 27 basis points to 511, the most since
April 18.

Slowing Issuance

Spanish toll-road operator Abertis Infraestructuras SA and
Unibail-Rodamco SE, Europe’s largest publicly traded property
owner, were among companies selling 11.4 billion euros ($15.1
billion) of bonds this week, 28 percent below the weekly average
for the year, according to data compiled by Bloomberg. Sales of
high-yield bonds slowed to 919 million euros from 1.2 billion
euros the previous week, the data show.

Bakkavor Group Ltd., a junk-rated U.K. food producer,
offered to pay investors more than originally planned when
selling 150 million pounds ($233 million) of seven-year notes
yesterday, according to a person familiar with the transaction.
The bonds were priced to yield 9 percent after being marketed at
8 to 8.25 percent, the person said.

“This is the first time in a long time that the pricing on
a high-yield deal has had to be widened to court investors,”
said Suki Mann, a strategist at Societe Generale SA in London.
“We’ve been in a bull market for the asset class for a while.
The widening of price guidance on Bakkavor’s deal is simply
because of the current weakness everywhere on tapering fears.”

Credit Risk

The Markit iTraxx Crossover Index of default swaps on 50
companies with high-yield credit ratings reached a two-month
high of 471 basis points yesterday, after jumping 49 basis
points this week. An increase signals deterioration in
perceptions of credit quality.

A basis point on a credit-default swap protecting 10
million euros of debt from default for five years is equivalent
to 1,000 euros a year. Swaps pay the buyer face value in
exchange for the underlying securities or the cash equivalent
should a borrower fail to adhere to its debt agreements.